Blackstone Makes Foray Into Houses for Rent: Mortgages

A giant foreclosure auction sign is placed in front of a home in San Jose, California. Blackstone Group LP has acquired more than 1,500 houses around Phoenix and Southern California. Photographer: Tony Avelar/Bloomberg News

July 3 (Bloomberg) -- Blackstone Group LP, the biggest
buyer of U.S. commercial real estate since prices bottomed, is
jumping into residential property as housing recovers.

The private-equity firm has spent more than $250 million
this year buying foreclosed single-family houses with the
intention of renting them out, said two people with knowledge of
the effort. The goal is to acquire enough assets to potentially
take public as a real estate investment trust, or sell to
another company or even to tenants, said the people, who asked
not to be identified because the plans are private.

Blackstone, which has loaded up on strip malls, warehouses
and suburban office buildings in the past two years, is turning
to residential real estate after a 34 percent plunge in prices
since the 2006 peak. The New York-based company is the biggest
investor seeking to enter the single-family leasing market as
rents climb and the U.S. homeownership rate sits at a 15-year
low, joining rivals including KKR & Co. and Colony Capital LLC.

“It’s turning into a $10 billion industry,” said Colin
Wiel, managing director and co-founder of Waypoint Homes, an
Oakland, California-based company that has bought about 1,800
distressed homes for rent with backing from investors including
GI Partners and Columbia University. “There’s a lot of
competition.”

Blackstone’s real estate group has teamed with principals
of Treehouse Group LLC of Tempe, Arizona, and Dallas-based
Riverstone Residential Group to buy and fix up the homes, find
tenants and maintain the rentals, said the people familiar with
its strategy. Riverstone is an apartment-management company
founded by brothers Nick and Peter Gould, owners of U.K.
property-investment firm Regis Group Plc.

Distressed Properties

So far, Blackstone has acquired more than 1,500 houses
around Phoenix and Southern California, the people said. It
plans to buy in markets with the greatest supply of distressed
properties, including Florida, Northern California and Georgia.

About 6 million U.S. borrowers will lose their homes in the
next five years because of inability to pay their mortgages,
creating demand for as many as 4 million new rental households,
according to Scott Simon, head of mortgage bonds at Pacific
Investment Management Co. in Newport Beach, California. Tom
Shapiro, chairman of GTIS Partners, estimates a $1 trillion
market for single-family rentals. His New York-based real estate
investment firm expects to invest $1 billion in the area by
2016.

Finding Homes

Capitalizing on the distress requires solving a puzzle: how
to buy enough homes and manage the properties in a way that’s
economical. Bulk sales of repossessed homes by banks and U.S.-
owned Fannie Mae have been relatively rare.

Buyers have been chosen for the largest group sale, about
2,500 homes repossessed by Fannie Mae, the Federal Housing
Finance Agency said today in a statement. Winning bidders for
the homes -- located in Atlanta, Chicago, Florida, Las Vegas,
Los Angeles and Phoenix -- won’t be named until after the
transactions are completed.

“We are pleased with the response from the market and look
forward to closing transactions in the near future,” Edward J.
De Marco, acting director of the FHFA, said in the statement.

Home seizures are close to a four-year low as lenders are
slow to resume processing of foreclosures following a February
settlement by the five biggest loan servicers over improper
practices, according to Irvine, California-based data firm
RealtyTrac Inc.

20 Houses

“While a lot of people are talking about it, very few have
actually built significant portfolios and even fewer, if any,
have achieved significant economies of scale,” said Stephen
Coyle, chief investment officer of Cohen & Steers Global Realty
Partners, the private-equity fund unit of the New York-based
real estate stock investor. “The people who have made the most
money at it are the guys who have, like, 20 houses or so.”

The venture marks Blackstone’s first major foray into the
U.S. residential market. The company was the top buyer of
commercial real estate in 2010 and 2011, spending about $16.7
billion, according to Real Capital Analytics Inc. in New York.
Deals included the $9 billion purchase of more than 500 shopping
centers from Centro Properties Group and industrial properties
valued at $1 billion from Prologis.

U.S. commercial-property prices have gained about 26
percent from a post-crash low in January 2010, according to an
index compiled by Moody’s Investors Service and Real Capital.

Smaller Declines

In the housing market, price declines are easing. The
S&P/Case-Shiller index of values in 20 U.S. cities fell 1.9
percent in April from a year earlier, the slowest pace since
2010.

While mortgage rates are at record lows, rental demand has
climbed because many Americans can’t buy homes because of
insufficient income or bad credit, or because they prefer the
flexibility of renting. Monthly apartment rents in the U.S. have
jumped almost 6 percent since the end of 2009, to an average
$1,018 in the first quarter, according to Reis Inc.

Blackstone has an advantage over competitors in the housing
rental market in terms of readily available capital. The firm is
raising $13 billion for what will be the largest-ever private
equity real estate fund. Others are using a series of small
private funds. KKR is working with Atlanta-based homebuilder
Beazer Homes USA Inc. to raise money by selling shares for a
non-public REIT.

$525 Billion

A publicly traded REIT that owns and manages single-family
homes would be a new twist on a familiar structure that enables
stock investors to take part in the real estate market. The REIT
industry has an aggregate market value of about $525 billion,
according to the National Association of Real Estate Investment
Trusts, a Washington-based trade group.

“REITs could be effective in channeling capital to address
the ongoing problems in the single-family housing sector,” said
Ron Kuykendall, a spokesman for the group.

Buyers of foreclosed houses face the challenge of managing
properties scattered among different neighborhoods and states,
compared with managing an apartment building with hundreds of
units within one property. Bargain-seeking investors also are
finding that home prices have begun to rebound in many markets,
making it harder to accumulate homes at deep discounts.

Phoenix Prices

In Phoenix, one of the first markets targeted by investors
in single-family rentals, the median price of a single-family
house jumped more than 32 percent from May 2011 to May 2012 and
the supply of for-sale homes fell by 50 percent, according to a
June 27 report by Michael Orr, director of the real estate
center at the W.P. Carey School of Business at Arizona State
University.

Investors, who bought 28 percent of the homes, often paying
all cash, are bidding up prices at the low end of the market,
Orr said.

“Most houses below $250,000 priced realistically are
attracting large numbers of offers in a short time, and many
exceed the asking price,” Orr wrote.

Surging rental demand has pushed up apartment rents and
occupancy enough to justify a rebound in new multifamily
construction from 2009’s five-decade low. The Bloomberg
Apartment REIT Index had a 181 percent total return in the three
years through June, compared with 137 percent for the broader
REIT index and 58 percent for the Standard & Poor’s 500 Index.

National Brand

“As an asset class, single-family REITs will exist,”
Colony Capital Chairman and CEO Tom Barrack told Bloomberg
Television on March 20. “What you need is a national brand.”

Barrack is building an in-house staff to realize his plans
to acquire $1.5 billion of rental homes by April of next year,
Justin Chang, acting president of the firm’s Colony American
Homes unit, said in a June 8 interview. The business, based in
Scottsdale, Arizona, has acquired more than 1,200 houses and
hired 125 people to buy and maintain properties in Arizona,
California and Nevada, he said at the time.

Colony American Homes last week purchased about 300 homes
in the Houston area for about $30 million. It is in talks to buy
more properties in Texas, in markets including Dallas, Austin
and San Antonio, Chang said in a statement.

Colony plans to hold the homes it buys. Institutional
ownership could provide stability to the housing market, Barrack
said in the TV interview.

“If speculators are just buying these homes and trying to
flip them, you’re fighting your own market,” he said. “The
object is to manage them over time, just like multifamily.”

Beazer Rentals

The KKR venture, Beazer Pre-Owned Rental Homes Inc., had
raised $85.3 million as of May 15 through the sale of shares in
a private REIT, according to a filing with the Securities and
Exchange Commission.

The venture, based in Phoenix, owns almost 200 single-family homes in Phoenix and Las Vegas. It’s led by CEO Patrick
Whelan, who was chief operating officer of Archstone, the
apartment company that’s owned by the estate of Lehman Brothers
Holdings Inc.

Investment yields are coming down as more competitors enter
the fast-moving market, said Waypoint’s Wiel. Buyers of single-family homes for rent can achieve yields of about 8 percent
excluding debt but that eventually will fall to the about 6
percent return seen by apartment-property investors, he said.

“My prediction is five years from now, the single-family
rental industry will look just like the multifamily rental
industry,” Wiel said. “Mom and pop owners figured it out a
long time ago.”